The value of Bitcoins has doubled since they hit bottom last month. We take a …

The last time we wrote about Bitcoin, in October, the currency's future looked grim. A series of security incidents had created an avalanche of bad press, which in turn undermined public confidence in the currency. Its value fell by more than 90 percent against the dollar.

We thought Bitcoin's value would continue to collapse, but so far that hasn't happened. Instead, after hitting a low of $2, it rose back above $3 in early December, and on Monday it rose above $4 for the first time in two months. It's impossible to predict where the currency will go next, but at a minimum it looks like the currency will still be around in 2012.

This presents a bit of a puzzle for Bitcoin skeptics. The original run-up in prices could easily be explained as a speculative bubble, and the subsequent decline as the popping of that bubble. But if that were the whole story, then the value of Bitcoins should have continued to decline as more and more people lost confidence in the currency. That hasn't been happening.

Of course, the value of Bitcoin could resume falling at any time, but the currency's apparent stability over the last month has inspired us to give it a second look. How can an ephemeral currency without the backing of any large institution be worth $30 million, as the world's Bitcoins currently are? In the short run, a currency's value can be pumped up by a speculative bubble, but in the long run it must be backed up by "fundamentals"—properties that make holding it objectively valuable.

Dollars are valuable because they're the official medium of exchange for the $14 trillion US economy; euros and yen are valuable for similar reasons. Bitcoin boosters have traditionally suggested that Bitcoin is an alternative to these currencies. But we'll suggest an alternative explanation: that Bitcoin is not so much an alternative currency as a "metacurrency" that allows low-cost and regulation-free transfer of wealth between nations. In other words, Bitcoin's major competitors aren't national currencies, but wire-transfer services like Western Union.

Bitcoin is a bad currency

While Bitcoin isn't a very good currency, it has the potential to serve as a "metacurrency": a medium of exchange among the world's currencies.

The traditional argument for Bitcoins has positioned the peer-to-peer currency as an alternative to conventional currencies like dollars, euros, and yen. Bitcoin boosters point to two major advantages Bitcoins have over dollars: price stability and lower transaction costs. As we'll see, neither of these advantages is compelling for ordinary consumers.

The argument from stability mirrors the traditional argument for a gold standard. The dollar has lost about 95 percent of its value over the last century. The Bitcoin protocol is designed to never allow more than 21 million Bitcoins to enter circulation, and supporters argue that this guarantees the currency maintains its value over time.

The obvious problem with this argument is that Bitcoins have lost more than 90 percent of their value in five months. It would be pretty foolish for someone worried about the dollar's 3 percent inflation rate to put their life savings into a currency with that kind of volatility.

Bitcoin boosters forget that the value of a currency is determined by supply and demand. Demand for dollars is driven by the size of the US economy, which doesn't change very much from year to year. But the demand for Bitcoins is primarily driven by speculative forces, causing its value to fluctuate wildly.

Another oft-touted benefit of Bitcoin is lower transaction fees. Banks make a tidy profit charging merchants to complete credit- and debit-card transactions, and these fees raise the price consumers pay for goods and services. Fans tout Bitcoin payments as a low-cost alternative to traditional credit card transactions.

But this argument ignores the fact that credit cards provide important benefits in exchange for those transaction fees. If you buy something with a credit card and get ripped off, you can dispute the charge and get your money back. In contrast, Bitcoin transactions are irreversible. If you pay a merchant in Bitcoins and he rips you off, (or someone hacks into your computer and makes a fraudulent payment), you're out of luck.

Of course, third parties may offer Bitcoin-based payment services that offer features such as chargebacks and fraud protection. But such services don't come free; consumers or merchants would have to pay fees to use them. And there's no reason to think Bitcoin-based banking services would be any cheaper than traditional ones in the long run.

Paying with Bitcoins also introduces the inconvenience of fluctuating prices. When people buy things with cash or credit cards, their purchases are denominated in the local currency. Dealing in Bitcoins means customers and businesses must regularly convert between dollars and Bitcoins, and must therefore worry about the fluctuating exchange rate between them. That's a headache few people want.

So Bitcoins are not a compelling alternative to conventional currencies. Although there are a few isolated examples of traditional businesses accepting Bitcoins as payment, these seem to be driven more by the novelty of the concept than by compelling economic or technical advantages.

Bitcoin as a metacurrency

While Bitcoin isn't a very good currency, it has the potential to serve as a "metacurrency": a medium of exchange among the world's currencies. In this role, it has the potential to be a powerful competitor to wire transfer services like Western Union.

The longer Bitcoins continue to exist, the more confidence people will have in its continued existence.

The wire transfer industry is much less consumer-friendly than the credit card industry. Wire transfer fees can be much higher than credit card fees, and wire-transfer networks offer much less robust fraud protection services than do credit card networks.

Moreover, the flow of funds across national borders is heavily regulated. Governments monitor the flow of funds in an effort to stop a variety of activities they don't like. In the US, the focus is on terrorism, tax evasion, gambling, and drug trafficking. (Carrying cash across borders in a suitcase invites similar government scrutiny.)

Bitcoin allows wealth to be transferred across international borders without the expense or government scrutiny that comes with traditional wire transfers. An American immigrant wanting to send cash to his family in India needs only to find someone in the United States to trade his dollars for Bitcoins. He can then transfer the Bitcoins to his relatives in India, who then need to find someone willing to take Bitcoins in exchange for rupees.

This decentralized money-transfer process will be much harder for governments to control than a centralized money-transfer company like Western Union. And that will make the world's governments upset, since the same technology can be used by an American drug dealer to send profits back to his partners in Latin America.

But there may be little governments can do about this. They can attempt to mandate the reporting of Bitcoin transactions, but there's no obvious way to enforce such a regulation, since Bitcoin transactions are easy to obfuscate. At most, governments could prohibit the conversion of funds between local currencies and Bitcoins, but this will merely push the currency underground, not eliminate it altogether.

If Bitcoin's value stabilizes, it will also become a way to store wealth beyond the reach of any government. Cash and gold are bulky, hard to move, and subject to confiscation. In contrast, the encrypted credentials of a Bitcoin wallet can be stored securely on a server anywhere in the world. This could make the currency appealing to anyone wanting to place his wealth beyond the reach of the law—a corrupt government official wanting to hide ill-gotten gains, a political dissident who fears his life savings will be taken, or an ordinary citizen worried about the solvency of traditional banks.

Bitcoin's role as a way to move and store wealth does not depend on Bitcoins being widely used for commerce. For Bitcoin to work as a viable "metacurrency" only requires that there be a liquid market between Bitcoins and national currencies. Such a market already exists for several major currencies.

Chicken and egg

Of course, there's a circularity to this argument. Bitcoin's value as a way to move and store wealth depends on the value of Bitcoins being relatively stable against conventional currencies. And the continued value of Bitcoins depends on people finding nonspeculative uses for it. But if the currency continues to retain its value in the coming months (a big if, admittedly) this would be a sign that the chicken-and-egg problem has been solved. And the longer Bitcoins continue to exist, the more confidence people will have in its continued existence.

Western Union moved $70 billion across borders in 2010, earning about $1 billion in profits. There's no Bitcoin Inc. to compete directly with Western Union, but the owners of Bitcoins can be thought of as shareholders in a decentralized Western Union alternative. If the Bitcoin network captures a small fraction of Western Union's money-transfer business, the currency's current "market capitalization" of around $30 million could wind up looking downright puny.

176 Reader Comments

1- This is the general answer again it creates incentive to horad money. This is bad for the economy because if you know you can buy more tommorow than you can buy today with the same money you will hold onto the money. This creates more downward pressure on prices and wages creating a downward spiral creating a liquidy trap. Deflation or near deflation has been responsible for oh I don't know every one of the worst economic periods in the United States History. The aftermath of the end of the Second US Bank, Going back to the Gold Standard after the Civil War, and the Great Depression. Never mind the instablity cycle that ran about 8 to 10 years while on the gold standard where there where shorter recessions brought on by short term deflation.

2- Related to the above but wealth being cornered. With Bit Torrent the top of the sceme I mean early adaptors can corner the supply side in effect retarding the market. There is no mechanism in place to expand the money supply creating opertunities where the economy is working perfectly but there is simply no cash to actually operate the day to day business. You have demand and supply both in ready but there is nothing to actually compelete the transaction.

The flow of capital is not one-way. Hoarding can only be done so far until the incentive for hoarding is outweighed by the incentive to acquire other resources. It is only bad for certain parts of an economy - notably the unnecessary parts. It can just as easily be stated that 'every one of the worst economic periods' has been brought on my over-investment in wasteful efforts.

If half of a country decided to produce pogs and the economy exploded to new highs because of the popularity, the world might seem bright and shiny. When demand for pogs dies down, everyone will be screaming about deflation even though it was an obviously asinine move to base an entire economy on a fad.

So the world should only produce minimum shelter and some food? Of course even in deflation people will make neccesary purchases like food, engergy, shelter and such. Because of efficencies this is only so much of the economy. Buying the new car instead of keeping your current car slows way down in a deflating economy because why would I buy a new car for 20k this year when I can get the same car next year for 18k. The economy as a whole does this and the car than drops to 17k and the purchases are only because you have to have that car.

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Decrying the era of gold-standard usage for it's deflationary cycles is like being upset that you can't eat Turkish delights all day, every day for your entire life without getting sick.

Yeah, it was so awesome to live during a time where every 7-10 years there was a recession and a depression every 20 or so years.

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he second item is a search for the Goldilocks economy without acknowledging flaws in the existing one, or any system for that matter. Early adoption is not a bad thing. There have been numerous technologies (including internet transactions) that were adopted early by the porn industry, yet we don't cry about them. Instead, the growing pains were handled by those first involved with it.

What you don't see during the growth phase is the amount of work and effort that goes into the development. Unless you're actively part of it, you can't know. It is obvious that anyone with concerns about liquidity has done little, if anything, to explore the Bitcoin economy.

Do some research before making baseless claims derived from the laughable aspects of MMT.

Kind of funny how every economic theory that uses models agrees on just 1 thing and that is sound money is stupid. They don't agree on much else but this they do. Funny how its the Austrians with there this is the way the world should work theory of economics are the biggest cheerleaders for this failed policy.

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jimisawesome wrote:

Huh? Currencies are not meant as an investment. Currency is meant to be a means of exchange. How soon we forget September 2008. Without easily available cash the day to day economy comes to a crashing hault. Investments are meant to be something today cost you less than it will cost you tommorow. Currency is meant to keep up with the growth of the economy and small bit of inflation is a feature and not a bug in the system.

Currencies can be an investment. What would you call forex trading? Isn't that investing in the shares of one country versus another? It isn't all that different from bonds.

They can be an investment but they are not desiged to be an investment they are designed to be a means of exchange. Kind of like comics are designed to be read but people buy them to collect and they can become an investment given enough scarcity.

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I do agree about the liquidity issue, so long as liquidity is the right answer for the problem. In 2008, the problem was debt, not liquidity. Adding liquidity disguised the debt, but did not solve the problem - it only made the danger grow.

In Sept 2008 the problem was liquidity not debt. Debt issues where the over riding problem but the Lehman Brother panic was caused by liquidity. There was no money moving at all for like 12 hours and a trickle after that. Groups with perfect credit could not get their short term loans needed to run their companies.

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jimisawesome wrote:

The market cap for bitcoins is what 20 million dollars? That is not an economy on its own its a blip on the radar in a 62 trillion dollar economy. The goods and services that use bitcoin are lets be real black market. Amazon, Best Buy, the gas station down the block do not accept it nor will they ever accept it.

There are 158,789 blocks at a size of 50 blocks each for a total of 7,939,450 bitcoins. The current BTC/USD exchange rate is about $3.90 per BTC. The market size of the Bitcoin economy is USD$30.9mm within a small margin.

Transparency is part of Bitcoin. This is not so with any existing financial systems. Again, this is a consensus-based requirement that cannot be overridden or obfuscated by a central authority. Every single unit is accountable, as is every relevant transaction.

Transparency is about the most overrated thing there is. In the real world people don't care they only care that it works. This is something that internet libertarians never understand. You can have an open currency all you want but when its doomed to failure they will ignore it.

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jimisawesome wrote:

Who cares? Wow milk cost a nickle in 1924 when the daily wage was 50 cents. What matters is purchasing power. In this respect the world economy has never had as high of purchasing power as they have in recent times and this includes western countries. Sure there is some income inequility issues were the middle and poor classes have had the same purchasing power for the last 30 years but that is a seperate issue and that the gold standard only makes worse for reasons already discussed.

Businesses care.

Price stability (or at least certainty), is very important for a business to make future projections about everything from hiring new employees to purchasing additional stock. The less the stability, the less likely a business is to expand in any way. How is that good for an economy?

Consumers may only care about purchasing power, but they don't make the goods that are bought with that purchasing power. Without healthy businesses providing goods and services, purchasing power is worthless.

Do you know what the number 1 by far with nothing else even worth mentioning concern is to buisness owners for the last 4 years is? The lack of demand.

Fiat money is more stable that sound money for the simple reason there are controls in place to heat up and cool down an economy.

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jimisawesome wrote:

Sabbe wrote:

An important lesson is that all monetary systems have some type of bubbles, but with Bitcoin those bubbles can be very small once we reach a high enough market cap. The deflation could temporarily cause hoarding and lack of investment, which would actually affect the economy in a negative way leading to degrowth which would then cause inflation. This would balance it out by creating an incentive to invest again. Hoarding would only be good to a certain limit, after that limit the economy would slow down and start contracting which would cause inflation and a realization that we need to hoard less.

How about every economic model there is? How about history? You know what history has actually shown? That to stop the downward spiral you either need to increase the balance of trade in your nations favor, increase the money supply, and/or increase the demand. That is how the inflation needed to grow the economy is created. Shrinking the GDP does not cause inflation.

More MMT. The only point that holds true in anything other than a number-shuffler's abstract fantasy is that productivity needs to be increased to raise the balance of trade. Anything else is simply an accounting gimmick.

You forgot Keynes and Monetarism.

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jimisawesome wrote:

I will make an educated guess. bitcoins will have limited use in mostly low level illegal activity and some gold bugs. No one that actually makes a living in trading and investment will touch these things. No legit business of any size will every accept these things. The general public will never care enough to know what these are and the few that do will think they are used to buy child porn.

Have you ever bought an item from Amazon? Made a payment using PayPal? Bought a subscription on ArsTechnica? Online transactions got their start in the porn industry. Now where are online transactions? Everywhere.

Yes and I used good old american dollars to do so.

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These are the growing pains, but it is already evident that there is no way to stop Bitcoin. It is not a tangible thing to be blocked by building a dam or shooting it. The entire system is based on an idea, and that box was opened in 2009. There's no going back now.

Put down the Matrix and Inception dvds.

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Here's a hypothetical situation: assume I'm a high-net-worth individual. I want to get my assets out of my country, but there are limits in place for how much I can transfer without them being held for a lengthy period of time or even seized. One solution could be to buy a bunch of traveler's checks and try to make it across a border. Another could be to carry a big brick of gold. Those options are extremely dangerous, as I'd have to declare them and even if I'm legally compliant, confiscation remains a danger. If I have a third party help to facilitate a large transaction, I'd better trust that party an awful lot (or them, if enlisting several).

They have these things called wire transfers, cashier checks or bearer bonds now a days. The US is not in the habit of confiscating money from high net worth indivdiuals unless they can be tied to tax envasion, money laundering or other illegal activities.

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Rather than risking all that, I could simply make a domestic purchase of whatever size I wanted for whatever amount of Bitcoins I can acquire. Then, I can cross any border without any physical forms of wealth or even any record of ownership. I don't even need to backup my wallet file that holds the keys to my assets if I use a system like Electrum. On the other side, I can easily and safely recover my wealth.

You might be surprised at how many high-net-worth individuals are just starting to worry about their wealth and are looking for an exit. Are they criminals for being worried that their wealth might be stolen?

Yeah that mass flood of individuals out the country. A whole 1000 give or take a year.

So the world should only produce minimum shelter and some food? Of course even in deflation people will make neccesary purchases like food, engergy, shelter and such. Because of efficencies this is only so much of the economy. Buying the new car instead of keeping your current car slows way down in a deflating economy because why would I buy a new car for 20k this year when I can get the same car next year for 18k. The economy as a whole does this and the car than drops to 17k and the purchases are only because you have to have that car.

I hoped the discussion would reach this argument because this where insanity meets rationality.

So it is apparently a good thing that we create an artificial incentive for people to consume? The whole economy is based on this, the inflationary monetary system is just one part of it. A bigger part is mass advertising that uses all the modern psychological methods that science has come up with to try to get people to consume more and more. In the mean time we are overconsuming and polluting our natural resources in such an unsustainable way that we reach new heights for the human race, every decade.

Yet we see people buying new electronics all the time even though you tend to get a significantly more advanced device with the same purchasing power if you wait a year or two. People don't restrict their buying to only food and shelter in a deflationary environment, they buy everything they feel they need. And as it happens people seem to have a real use for more advanced electronics, I do for sure. The electronics industry has a lot of purely manufactured demand as well which can all go as far as I'm concerned.

The effects of a deflationary environment depends on how large the deflation rate is. I've already explained that for Bitcoin the biggest deflation manifests itself in adoption spikes while the rate of deflation outside of these spikes is actually quite acceptable. This creates an environment where the regular person will still consume quite a lot. Possibly, and hopefully he will consume less because what the planet desperately needs is less consumption, not more.

The current global situation is such that there is no possible realistic scenario (unless you grab a nanotech/fusion or whatever -card from your ass) to keep increasing our consumption levels without eventually facing a total civilization level collapse. The people in China and India are all looking at the Western world as something they want to become, immersed in materialistic abundance. The human population does not even have to grow at all, it'll be a disaster regardless.

We actually have many ways to provide abundance and a high standard of living for everyone on the planet but it requires a less wasteful way of live, much less wasteful. Degrowth is a requirement, not a question of if it is good or bad. It might be bad but the alternative is hell of a lot worse.

This went perhaps a little off topic but not by much, one of the reasons I advocate Bitcoin is that I think the economic model is actually much healthier than what we have now. I'm not behind any economic school, although I agree with the Austrians as far as deflation is concerned. My views are more in the direction of the degrowth movement. Bitcoin is one component to help achieve the degrowth that is needed.

To me it seems that most of the world is truly upside down, people have lost their sanity. The blindness encompasses everything. To live in an economic paradigm which thinks it is always bad that the GDP goes down and our consumption levels go down makes me feel I'm living on the wrong planet. People don't stop to consider that a good portion of GDP increase is waste. If the medical industry has more demand and thus they increase their money flow and GDP rises, is it societal efficiency? People are dieing and getting sick more. Think about it, really. This applies to many other industries as well.

The kind of economic environment Bitcoin would bring about would certainly not kill consumption. People would still consume because they need stuff. They would even consume stuff they want but don't necessarily need. Difference is that they would be a little more selective. We would see degrowth because less companies would be needed to produce all the junk we consume. People would be buying less junk. And if someone actually thinks of this as a bad thing I'm really not interested in discussing the subject further, it's complete lunacy from my view.

This is the only argument I needed to address this time. Miscreanity is doing a great job, I like his responses. Keep going.

Note that I disagree with FOFOA's views on Bitcoin. I believe this stems from the fact that he has some core misunderstandings about the structural nature of the system. Notwithstanding, the majority of his material is highly detailed, informative and proving very accurate.

Bitcoin is established; it has proven resilient enough to withstand a potentially-catastrophic phase and is still garnering support. There is almost nothing that can stop it as an international monetary utility now.

The effects of a deflationary environment depends on how large the deflation rate is. I've already explained that for Bitcoin the biggest deflation manifests itself in adoption spikes while the rate of deflation outside of these spikes is actually quite acceptable. This creates an environment where the regular person will still consume quite a lot. Possibly, and hopefully he will consume less because what the planet desperately needs is less consumption, not more.[..] This went perhaps a little off topic but not by much, one of the reasons I advocate Bitcoin is that I think the economic model is actually much healthier than what we have now. I'm not behind any economic school, although I agree with the Austrians as far as deflation is concerned. My views are more in the direction of the degrowth movement. Bitcoin is one component to help achieve the degrowth that is needed.

The bug is a feature. Bitcoin is the solution to pollution, social inequality and global warming. Sorry mate, but I'm not convinced. For me, it looks more like you're searching for arguments to support your predetermined view that bitcoins are awesome.

miscreanity wrote:

Bitcoin is established; it has proven resilient enough to withstand a potentially-catastrophic phase and is still garnering support. There is almost nothing that can stop it as an international monetary utility now.

The only thing that has been proven is that the bitcoin market is highly speculative and that bubbles eventually burst (ok, we should have known that already). You're just making wild claims without any argument or data to back it up. Keep living in your phantasy world.

Of all the lies and fairy tales normally intelligent, rational Americans believe, the unfounded belief that they will someday be part of the 0.1% that owns everything (and thus that it's somehow rational to lower capital gains taxes and deregulate everything to aid the Wall Street looters) is the most most pernicious.

Lapis wrote:

People on underground websites like silk Road discovered, you could use bitcoin to (somewhat) anonymously buy drugs. That's when it made its comeback and started to stabilize.

Emphasis on the "somewhat". When Silk Road turns out to be an elaborate sting, and some government agency ends up with all their Bitcoin addresses, a lot of people are going to be very unhappy about their anonymity going *poof*.

The only thing that has been proven is that the bitcoin market is highly speculative and that bubbles eventually burst (ok, we should have known that already). You're just making wild claims without any argument or data to back it up. Keep living in your phantasy world.

The Bitcoin economy as of December 27th, 2011 requires a minimum inflow of about USD$180,000 per week (50BTC every 10 minutes [300BTC/hr*24=7200BTC/day] for 50,400BTC every week [7200BTC/day*7=50,400BTC/wk] multiplied by exchange rate from prior week [MtGox USD]: 50,400*$4 or $201,600) to maintain the present exchange rate. That's approximately 0.6% of the market size (200,000/32,000,000) every seven days. Since the low in mid-November, a little over $720,000 would've been needed to maintain a steady rate of about $2.50/BTC while keeping up with unit generation.

Bitcoin's USD exchange rate has not remained at $2.50/BTC, but increased by 60% to around $4/BTC. The size of the economy thus increased from less than $18mm to almost $32mm, even though the number of Bitcoins in existence has increased by about 400,000 during the same time to a total of over 7.96mm - an additional 5% inflation rate over the last 6 weeks. Of course, that inflation dilutes the value of each existing unit and is why capital inflows must persist to maintain a stable rate.

A logical conclusion would be that either one or more high-net-worth interests moved $14,000,000 of wealth into the Bitcoin economy, or participation in the fledgling economy is increasing. Both suggest a high level of confidence in the viability of a return on investment with the latter offering a more stable path. It is reasonable assume a combination of HNW interests and general population participation, so there is certainly the potential for a pump-and-dump situation, but no data to be 100% certain either way.

Considering the steady growth and relative lack of awareness from the general public, I think it far less likely that a pump-and-dump is feasible right now. A rapid acceleration in the exchange rate would be more indicative of such an effort, as it would rapidly garner popular attention and draw unwarranted excesses of capital flows which allow for the hypothetical perpetrators to cash out. Again, that is not the kind of action being exhibited.

That kind of speculation can be destabilizing, but only to a degree. If this were a gaming microcosm with its own managed economy, it might very well have collapsed. However, this is literally like no form of money ever before. Failure to understand that, and the inner workings, is a main component for continued skepticism.

On the other hand, realization of what the Bitcoin system is can easily lead to irrational exuberance. This results in what can appear to be a speculative pump-and-dump (a possibility), but can just as easily be savvy investors and traders recognizing over-extended circumstances and locking in profit. This would be no different from any other market.

As discussed earlier, the precious metals markets (paper contracts for futures & options, not physical) have been cornered and are presently being manipulated while professional participants are exiting those environments. The Bitcoin economy is exhibiting signs to the opposite, inline with physical precious metals:

There will be those fully capable of making large profits from a volatile bull market. That does not mean the underlying system is flawed. Profiting from trading wheat has no bearing on whether the wheat itself is useful (the degree of profit may depend on that factor, but not the act of profiting).

Another comparison might be Beanie Babies: they experienced a speculative bubble as many other items did, but it was not directly dependent upon their usefulness. As expected, popular demand waned and the prices collapsed. Bitcoin may see speculative bubbles, but there is still a useful purpose for them regardless of the presence or absence of relative over- or undervaluation. That usefulness remains because of the underlying structure of the system, which itself creates a draw for participation.

One more example: eating with hands seems archaic by many cultural standards. With the advent of utensils, they were gradually recognized for their benefits. Whether overvalued (made from expensive materials), undervalued (disposable) or common (readily affordable wood/base metal production), the structural design (fork, knife, spoon, chopsticks, etc) still has a purpose.

The Bitcoin system is a structurally valuable tool. It is built from abstract concepts (materials) that have high value, yet are exceedingly inexpensive to use. This is why it is more likely to grow than disappear. In fact, it is already spawning high-value derivative works.

Of all the lies and fairy tales normally intelligent, rational Americans believe, the unfounded belief that they will someday be part of the 0.1% that owns everything (and thus that it's somehow rational to lower capital gains taxes and deregulate everything to aid the Wall Street looters) is the most most pernicious.

Now you're reaching for straws and making statements out of context. Bitcoin is not an American phenomenon - it is global. The typically myopic view that focuses on the US may well assume all of Bitcoin is speculative. Expand your narrow view to grasp the implications of making the existing financial system, and even governments, largely irrelevant.

The movement of capital into Bitcoin by HNW individiuals or entities is a strong potential during early adoption of the system (speculative or not). As wealth becomes harder to maintain than create, those with a significant amount are generally the first to seek protection rather than profit. Eventually, the greater population realizes the same thing, although historically well after most of their existing wealth has been indirectly destroyed or stolen.

There are plenty of regions around the world where the domestic currency is second to the USD. With the USD becoming unstable, gold would normally be the default to fall back on. Gold is now well out of reach of many, even in gram quantities. The next option will be whichever one offers the greatest ease with the most money-like aspects.

Depending on the region, there may be indigenous items that can serve that purpose. However, for a general and internationally-recognized alternative, Bitcoin has very strong potential - especially with global mobile phone availability. Very thin clients can be made (and are being worked) for feature phones available in even the poorest of nations.

WDReinhart wrote:

Lapis wrote:

People on underground websites like silk Road discovered, you could use bitcoin to (somewhat) anonymously buy drugs. That's when it made its comeback and started to stabilize.

Emphasis on the "somewhat". When Silk Road turns out to be an elaborate sting, and some government agency ends up with all their Bitcoin addresses, a lot of people are going to be very unhappy about their anonymity going *poof*.

Please read the Bitcoin FAQ before encouraging ignorance by spreading misconceptions. A Bitcoin address itself does not associate identifying information. Anonymity is breached by obtaining other information, such as a shipping address. It has nothing to do with Bitcoin itself.

That kind of speculation can be destabilizing, but only to a degree. If this were a gaming microcosm with its own managed economy, it might very well have collapsed. However, this is literally like no form of money ever before. Failure to understand that, and the inner workings, is a main component for continued skepticism.

I disagree. Memory that every asset bubble ever has been touted as "like literally no other (class of asset) ever before" when it was inflating is a main component for continued skepticism.

miscreanity wrote:

Please read the Bitcoin FAQ before encouraging ignorance by spreading misconceptions. A Bitcoin address itself does not associate identifying information. Anonymity is breached by obtaining other information, such as a shipping address. It has nothing to do with Bitcoin itself.

I disagree. Memory that every asset bubble ever has been touted as "like literally no other (class of asset) ever before" when it was inflating is a main component for continued skepticism.

Bitcoin is a unique combination of prior technologies that has resulted in something greater than the sum of its parts. It is on the same scale as the Internet, the internal combustion engine and possibly even written language. This may seem extreme, but a deeper understanding of how the system works on multiple levels provides support for the claim.

The real potential for Bitcoin adoption is a window of opportunity involving the instability of fiat currencies in conjunction with multiple other factors.

The real potential for Bitcoin adoption is a window of opportunity involving the instability of fiat currencies in conjunction with multiple other factors.

Seriously?

Leaving aside the breathless my-internet-currency-is-totally-better-than-all-those-other-internet-currencies-that-failed-and-in-fact-rivals-THE-WRITTEN-WORD-as-mankind's-top-achievement part, can you actually type "instability of fiat currencies" with a straight face while touting something that's gone from $4 to $35 to $2 and back to $4 in a year?

Because wow... just wow.

If this is an elaborate troll, good job not tipping your hand until now. If it's not, I'm speechless...

Leaving aside the breathless my-internet-currency-is-totally-better-than-all-those-other-internet-currencies-that-failed-and-in-fact-rivals-THE-WRITTEN-WORD-as-mankind's-top-achievement part, can you actually type "instability of fiat currencies" with a straight face while touting something that's gone from $4 to $35 to $2 and back to $4 in a year?

Because wow... just wow.

If this is an elaborate troll, good job not tipping your hand until now. If it's not, I'm speechless...

Bitcoin's internal structure is very stable, unlike that of established fiat regimes. A discussion of the reason for decay in the latter is a much bigger topic than I have time to go into for now, but the gist is that the financial system today is built upon questionable promises which is leading to a bank run at the largest scales (e.g. MF Global) which will soon trickle down to the general population as the grab for anything with real value accelerates. Bitcoin is not based on promises, only continued functioning of the Internet.

The exchange rate relative to other currencies shows the flow of capital from a large pool of wealth into a smaller environment. As fiat systems decay, the flow simply becomes more pronounced which can lead to a conflated perception regarding volatility due to mistaken comparison between different magnitudes.

The concept is the difference between absolute and relative values. I'll try to explain it in numbers with two different units relating to each other out of an absolute total:

You can clearly see from the table that a very small change in Unit A results in comparatively large changes in Unit B even though the absolute share of the total is only changing linearly. The impression is that Unit B seems more 'volatile' next to Unit A. What's more important is why Unit A might be decreasing relative to Unit B. This will continue until the old system is supplanted by the new, an equilibrium range is achieved or something causes the process to reverse.

As for the speculative claims, Bitcoin operates in a similar manner to certain biological systems that result in emergent properties. My expectation is that these properties will be similar to the phenomena exhibited with an action potential. The application of systems similar to Bitcoin in computer systems outside of finance could very well produce a stochastic process without needing to fully simulate biological structures: in effect, a machine capable of growth and independent decision-making beyond existing paradigms; potentially a form of artificial life.

Granted, that has little to do with Bitcoin as a currency, but it is part of the reason why such decentralized networks are highly valuable and not going to disappear - especially Bitcoin; the system manages itself.

Bitcoin is based on fundamental ideas that are proven, have been tested over decades, and are not going away. It's only unique in the way the separate concepts are being integrated, and so far it has proven very resilient. That also offers the potential for a true implementation of direct democracy.

You forget a very important technical detail: the Bitcoin protocol requires the entire history of Bitcoin transactions to validate a transaction. If the BC economy grows a lot, that means tremendous amount a data to store, making the storage/verification accessible only to a small minority of entities with enough financial power to pay for that storage.

And then, you're back to a system where a few institutions (banks) control the system and can charge a lot for it.

All the early adopters of Bitcoin have a strong financial incentive to talk about the good aspects of BC and ignore or downplay the serious technical, economical and philosophical shortcomings of it. When it comes to Bitcoin, trust a BC user like you would trust a used-car salesperson for things relative to cars.

You forget a very important technical detail: the Bitcoin protocol requires the entire history of Bitcoin transactions to validate a transaction. If the BC economy grows a lot, that means tremendous amount a data to store, making the storage/verification accessible only to a small minority of entities with enough financial power to pay for that storage.

And then, you're back to a system where a few institutions (banks) control the system and can charge a lot for it.

All the early adopters of Bitcoin have a strong financial incentive to talk about the good aspects of BC and ignore or downplay the serious technical, economical and philosophical shortcomings of it. When it comes to Bitcoin, trust a BC user like you would trust a used-car salesperson for things relative to cars.

The blockchain is currently a little over 1Gb, which is easily handled by today's commodity smartphones. It should still be well under their typical 8-16Gb capacity by the time the asymptote at ~21mm units is approached at the end of this decade. There are projects underway that are making it easier for thin clients to extract the relevant transaction threads instead of pulling the entire blockchain, allowing for an even smaller storage footprint.

Usage of Merkle trees allows for integrity of the full transaction history to be maintained while culling unnecessary information. That prevents the blockchain from growing out of control, or it would probably be well into the hundreds of gigabytes today and rising exponentially instead of barely over one Gb.

It's also more likely that future advances in hardware technology will make the blockchain more accessible than not. Even power usage is gradually becoming less of a concern, potentially allowing for contributed computing cycles from all manner of devices.

There are concerns as with any other system, the concentrated control of processing power being one. However, the aggregate capacity of the current Bitcoin system has already become the most powerful distributed network in existence, besting the top supercomputers by far. Right now, it would not make sense economically for a commercial effort to dominate the network. That may change when the size of the Bitcoin economy is worth much more than a USD equivalent of $100mm.

Even with a larger reward, the 51% issue is very much like a laser ion trap in that only a small part of the whole can be manipulated at any given time (it's more complicated than this, but that's the most likely result), so even with the majority of processing power being concentrated, the effect would be minimal and/or short in duration. It's much more likely that a different approach to beat the system would be sought, such as wallet theft or DDoS targeting one party in a transaction to attempt double-spending (although determining the target's IP is virtually impossible, and eventual implementation of a system like cjdns could prevent DDoS).

Other potential problems do exist, and they are actually discussed ad infinitum within the Bitcoin community. Assumption is dangerous - participate in the community to understand what the issues are and the myriad solutions that have been proposed (some already implemented). The major possibilities are addressed in the FAQ and more in-depth analyses can be found in the forums and at Stack Exchange.

While there is a fanboy mentality among some, there are also plenty of proponents who understand that talking up the benefits while ignoring the potential pitfalls is counterproductive and can cause loss of confidence when the promises don't live up to the hype. You might be surprised at the level of realism among (predominantly technically savvy) Bitcoin users. At the present time, even with its possible points of weakness, Bitcoin simply outclasses most other systems that offer a similar function.

If you have specific items regarding the technical, economic and philosophical shortcomings, make them known before asserting strong blanket statements. I think you'll find that, upon closer inspection, the limitations in Bitcoin are significantly reduced compared to those in existing systems.

If you have specific items regarding the technical, economic and philosophical shortcomings, make them known before asserting strong blanket statements.

The economics have been discussed already, so I'll just add a philosophical issue: the more Bitcoin is used, the more valuable it gets, the more wealth I bring to the early adopters. Giving tremendous financial power to people that believed in voodoo economics is not exactly in improvement over the system we've actually got.